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© 2006 International Monetary Fund

October 2006

IMF Country Report No. 06/344

Former Yugoslav Republic of Macedonia: 2006 Article IV Consultation—Staff Report; Public Information Notice on the Executive Board Discussion; and Statement by the Executive Director for the Former Yugoslav Republic of Macedonia

Under Article IV of the IMF’s Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. In the context of the 2006 Article IV consultation with the Former Yugoslav Republic of Macedonia, the following documents have been released and are included in this package:

  • the staff report for the 2006 Article IV consultation, prepared by a staff team of the IMF, following discussions that ended on June 5, 2006, with the officials of the Former Yugoslav Republic of Macedonia on economic developments and policies. Based on information available at the time of these discussions, the staff report was completed on July 13, 2006. The views expressed in the staff report are those of the staff team and do not necessarily reflect the views of the Executive Board of the IMF.

  • a Public Information Notice (PIN) summarizing the views of the Executive Board as expressed during its July 28, 2006 discussion of the staff report that concluded the Article IV consultation.

  • a statement by the Executive Director for the Former Yugoslav Republic of Macedonia.

The document listed below has been or will be separately released.

Selected Issues Paper

The policy of publication of staff reports and other documents allows for the deletion of market-sensitive information.

To assist the IMF in evaluating the publication policy, reader comments are invited and may be sent by e-mail to

Copies of this report are available to the public from

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Staff Report for the 2006 Article IV Consultation

Prepared by the Staff Representatives for the 2006 Consultation with the Former Yugoslav Republic of Macedonia

Approved by Juha Kähkönen and Scott Brown

July 13, 2006

  • Article IV discussions. During May 24-June 5 the staff team met President Crvenkovski, Prime Minister Bučkovski, Deputy Prime Minister Šekerinska, Finance Minister Popovski, Minister of Economy Besimi, National Bank of the Republic of Macedonia Governor Gošev, Opposition Leader Gruevski, other senior officials, and representatives of the academic, banking, business, labor, political and international communities. Drafts of the Selected Issues papers were discussed in seminars. The mission’s concluding statement is available at

  • Staff. The team comprised Mark Griffiths (head), Christine Dieterich, Chris Marsh, Alexander Pivovarsky (all EUR), Alessandro Giustiniani (MFD), Eva Gutierrez (PDR), and Kevin Ross (Resident Representative); Juha Kähkönen (EUR) joined to conclude the discussions. Vladimir Munteanu (OED) also participated in the meetings.

  • Exchange Restrictions. The Executive Board granted FYR Macedonia an extension for restrictions under Article VIII Section 2 (a) until December 31, 2006. The one outstanding issue is passage of a regulation in relation to frozen foreign currency deposits; the authorities are committed to doing this by the end of the year.


  • Executive Summary

  • I. Introduction

  • II. Background

    • A. The Medium-Term Problem: Stability But Low Growth

    • B. Recent Developments

  • III. Prospects for 2006

  • IV. Policy Discussions

    • A. Medium-Term Outlook

    • B. Fiscal Policy

    • C. Monetary and Exchange Rate Policy

    • D. Structural Reforms for Medium-Term Growth

      • Improving Growth Performance and the Business Environment

      • Labor Market Reform

      • Trade Policy

      • Enhancing Financial Intermediation

  • V. Staff Appraisal

  • Text Boxes

  • 1. Implementation of Past Fund Policy Advice

  • 2. Macedonian Migration and Remittances

  • 3. Medium-Term Fiscal Challenges

  • 4. Is the Fixed Exchange Rate Appropriate?

  • 5. Financial Sector Reform: Where Do We Stand?

  • Figures

  • 1. Real Sector Indicators, 2000–06

  • 2. External Sector Indicators, 2000–06

  • 3. Financial Market Developments, 2004–06

  • 4. Money and Credit Developments, 2001–06

  • 5. Medium-Term Scenarios, 2005-11

  • 6. Exchange Rate Indicators, 2000–06

  • 7. Banking Sector Developments, 2001-05

  • Tables

  • 1. Selected Economic Indicators, 2003–07

  • 2. Medium-Term Balance of Payments, 2003–11

  • 3. Central Bank Accounts, 2004–07

  • 4. Monetary Survey, 2004–07

  • 5. Central Government Operations, 2004–07

  • 6. Indicators of Financial and External Vulnerability, 2001–05

  • 7. Composition of Central Government Debt, 2005-06

  • 8. Fiscal Debt Sustainability Framework, 2001-11

  • 9. External Debt Sustainability Framework, 2001-11

  • 10. Medium-Term Macroeconomic Framework (Ambitious Policies)

  • 11. Medium-Term Macroeconomic Framework (Weak Policies)

  • 12. Financial Soundness Indicators, 2001-05

  • Appendixes

  • I. Fund Relations

  • II. Statistical Issues

  • III. World Bank Relations

Executive Summary

Economic performance has started to improve. For more than a decade, economic growth was sluggish, in part the result of external shocks. Last year, growth likely exceeded 4 percent, driven by strong exports. Inflation this year has picked up to 4 percent, but the pegged exchange rate should hold this in check. The external position is better, with gross reserves now at around €1,200 million (more than 4 months of imports, or 25 percent of GDP). This increase in reserves has allowed the NBRM to cut rates significantly, from 10 percent to less than 6 percent since October, and which commercial banks have partly matched. Credit is expanding, to households especially, though from a low base and slowly compared to the region. Fiscal policy is also modestly expansionary, last year’s ¼ percent of GDP surplus giving way to a projected 0.6 percent of GDP deficit. As a result, growth should remain at around 4 percent this year, with the current account deficit increasing only slightly.

However, the economy faces severe structural obstacles to the more rapid growth needed to raise living standards closer to European levels. Unemployment is exceptionally high, the financial system is still underdeveloped, and there are serious weaknesses in basic economic institutions.

Discussions focused on the main challenges facing the new government: sustaining and building on this recent improvement in macroeconomic performance, and reducing unemployment:

  • The authorities agreed that continued stable macroeconomic policy was a precondition for sustained growth. This meant keeping to the 0.6 percent of GDP fiscal deficit target, while the fixed exchange rate would guide monetary policy. Pressures to spend privatization proceeds were increasing, and the authorities largely accepted the need to resist these; however, medium-term challenges to the fiscal target (loss of telecom dividend, pension reform, EU accession) will be considerable.

  • This needs to be accompanied by structural reforms to create a functioning market economy. The mission highlighted the following priorities: (i) institutional reform (judicial reform, transparency in government decisions, telecoms liberalization) to promote factor productivity and growth; (ii) labor market reform (lower tax wedge, ending tax discrimination against part-time work) to reduce unemployment; and (iii) financial sector development (consolidating the banking system, revising the banking law, enhancing supervision). These themes are developed more fully in the accompanying Selected Issues papers, which the mission discussed in a seminar with the authorities.

With the current account improving, the level of the exchange rate for now is broadly appropriate.

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Public Information Notice (PIN) No. 06/98


August 11, 2006

International Monetary Fund

700 19th Street, NW

Washington, D. C. 20431 USA

On July 28, 2006, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with the former Yugoslav Republic of Macedonia.1

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July 28, 2006